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Peter DeSario, editor of our Interest Rates Pro Service, explains why this was a "monumental" week in the bond markets -- and offers a preview of which markets he's keeping his eye on.

[Editor's note: A text version of the interview is below.]

Alexandra Lienhard: Today on ElliottWaveTV I'm joined by Peter DeSario, interest rates strategist for Elliott Wave International's Pro Service team. Peter, let's jump right into it. You think something very significant just happened in the British Gilt, or 10-Year government bond. What was that?

Peter DeSario: Yes, I got excited this week when we really saw a very clean five wave decline traced out from the mid-August high in the Gilts. We had identified that high as potentially being one that could've ended a rally that began way back in 1990, and this is a start;it gives us a place to work from. We're, of course, expecting now to see a corrective rally, but we know that's only going to be corrective, and we'll see something more exciting to the downside to follow. So that was kind of exciting this week.

Alexandra: So, looking at Europe specifically, what's next for the bond markets over there? What are you keeping your eye on?

Peter: It's been interesting there. Back in [2014] we were looking at prices projected based on the Elliott wave counts that seemed to be developing in the Bunds and the Bobl, the 10-year and the 5-year instrument in Germany, that actually called for negative interest rates. That's just never happened before -- negative interest rates and sovereign debt. It seemed kind of preposterous, but the 133.78 price target we had for Bobls implied a negative rate of, like, -.5%. It just seemed that would be impossible for that to happen.

But low and behold, we got to -.6% and we had a spike top in late June. As far as the instrument underlying, the Bobl, we saw rates get to -.6% around early-mid July. And now, just last week, again we saw a spike back up. The futures actually tried to surpass that high, came very close basically, made a double top, but the cash did not. Now they've reversed course. So, it looks like we may be looking at some monumental turns there as well.

We're starting to see this in some of these sovereign debt markets around the world. Germany now has met our upside targets, and it looks like we're starting to see the early phases of a reversal. Now, a top does not necessarily mean a drop. That's one thing that we can get too excited about sometimes, but you have to remember that before you can go down, you have to stop going up. And that seems to be what's happened in a lot of these markets. We are going to be pretty excited about what's happening.

The Australian market looks like it's probably seen a major turn. And Japan is certainly flirting with one -- and, of course, everyone is excited about the United States, what's the story there?

Alexandra: Well, it's certainly an exiting time for sure. Changing the focus a little bit, this time of the year is when equities tend to be a bit more volatile. Does the same hold true for Treasuries? Are the two markets correlated at all?

Peter: Well, the correlation between equities and interest rate futures, or markets and instruments, is very interesting. We go for long periods of time where they go lockstep together, up and down together. We go for long periods of time when they go diametrically opposite. A few months back, it was like they were on opposite ends of a teeter-totter. Every time the S&P was up, bonds were down and vice versa. Then, all of a sudden, when everybody gets accustomed to correlating one way, it changes and goes the other way. So, it's not anything that you can count on. But you can count on the volatility kind of mirroring: When stocks start to get much more volatile, very often you're going to see the very same thing happen in the bonds.

It's interesting now, everybody is so concerned about Fed policy, it seems that every little tick down in bonds was supposed to be negative for stocks in the last week or so. They're afraid of the Federal Reserve and afraid of a change in interest rates, so for this moment, it looks like [stocks and bonds are] trying to go back in line with each other, but that can change. And it can change in a dramatic way that can fool a lot of people.

Alexandra: The sentiment swings and equity volatility of late, especially if they continue, given your experience, have we been in this kind of environment before?

Pete: I think it's interesting when we saw a period that the interest rate situation undermined the stock market, go back to 1987 and the bonds topped basically in April of '86 and were in a bear market and were going down, down, down and the stock market was ignoring it and ignoring it and ignoring it and kept moving higher. But then, all of a sudden, the stock market became sensitive to it and stated to collapse in September, October of 1987 to the extent that we saw the crash.

I was involved with a major brokerage firm at that time. There were rumors going around that they had lost lots of money in the bond market going down, while the stock market had been going up. While the market was basically making its bottom on the day of the crash, the head of the company came out and started bragging about the fact that they didn't have any more bonds, that they had cleaned them all out! And don't think that we're going to get wiped out because we don't have any bonds! Because the bond market took us apart, he said "we don't have any bonds now."

Of course, as he was talking, the bonds at that moment were making a bottom that stands to this day that was a major, major, major bottom. And of course the bond market saw a tremendous rally, and to not have the bonds because you're afraid of them was the worst thing you could've done at that time.

But, anyway, it's interesting the way the relationship between stock prices and bond prices will change. Even if we have a top in bonds this time around, there's no way you're going to be able to get through a situation when the stock market takes a really hard hit, or when the next inevitable recession comes, you're going to see again attempts to see a flight to quality. So it's not going to be a straight-line decline in bond prices by any means, and we hope to be on top of exactly what's going on with each jiggle as it happens.

Alexandra: It sounds like we're in an interesting market environment, for sure. Thanks for taking a couple of minutes today Pete, I know you're a busy guy.

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This article was syndicated by Elliott Wave International and was originally published under the headline Global Bonds: Why Our Analyst Says Things Just Got "Monumental". EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

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